Cisco Systems, Inc.'s Layoffs Aren’t Good News

Last week, Cisco (NASDAQ: CSCO  ) dropped a financial news bomb. It plans to deliver pink slips to 6,000 employees. Sadly, this news shouldn't surprise anyone who's been watching the market for a while. Like barbecues, pools, and relaxing, lay-around vacations, Cisco's been making layoffs a summer tradition.

Many investors cut companies a break for reductions in workforces, generally assuming they will juice profits. In truth, companies like Cisco are playing a dangerous game. We can't underestimate the risks that layoffs will destroy value instead of add to it.

History repeats at Cisco
Cisco didn't deliver great results when it made its announcement. Last year, its revenue fell on an annual basis for the first time in five years , dropping 3% to $47.1 billon. Although earnings per share dropped 20%, it still generated $1.49 per share. Despite less-than-rocking numbers and the need to contend with an evolving times, the company's not exactly in dire straits.

Here's a rundown of other layoff events at Cisco.

Last June, Cisco cut 4,000 jobs. It made that move despite the fact that it was still a profitable company with cash on its balance sheet. That should have raised eyebrows. In other words, things weren't that bad, unless one is worried about short-term profits, stock price, and what Wall Street thinks. In 2012, Cisco reduced its head count by a less dramatic but still considerable 1,300 . In 2011, Cisco sent 6,500 employees packing.

This time around, CEO John Chambers said that this latest layoff isn't about putting a lid on costs, but rather, it's "investing for growth." That seems awfully flip after repeatedly utilizing this tactic and not exactly providing the kinds of results people have been looking for.

Given Cisco's profitability and the $52 billion on its balance sheet , are repeated layoffs really justified? Although many investors probably hope for some strategically smart acquisitions, many companies' acquisitions end up falling flat over years' time. Some people invest in their workers; others throw money around on window dressing that covers confused strategy.

A tech layoff triple play
Of course, despite the economic recovery that's been publicized, Cisco isn't the only tech company that's pushing people back to the unemployment office.

In May, Hewlett-Packard (NYSE: HPQ  ) announced its intention to cut 16,000 jobs. That's a breathtaking number, but it's even more shocking given its previous plan to jettison 34,000 jobs, really putting the "massive" in "mass layoffs ." Maybe these changes will improve the future, but it's still a major risk that shouldn't be ignored.

Microsoft (NASDAQ: MSFT  ) has joined the litany of major tech layoffs. A month ago, it revealed that it will reduce its workforce by 14%, representing 18,000 jobs . About 12,000 of those jobs are connected to its acquisition of Nokia, which it paid $7.2 billion for last September .

More can be lost than won
Restructuring. Right-sizing. Streamlining. Cost cutting. These words describe layoffs, but such terms and numerical descriptions deflect the concept that actual people will lose their jobs.

The problems here aren't limited to sentiment, though. The danger also relates to business strategy. Deteriorating employee morale is bad for any business. That's how managements can kill innovation, not to mention shrink the will to come to work and do a good job at all.

Engaged workers are the best workers. If they're treated well and excited about their work days, feeling appreciated and rewarded, there's far more incentive to shine.

Lost talent is another huge risk. In the case of the tech world, the new guard is well under way -- they're boosting their workforces and looking for many ways to make their employees happy. Companies like Google (NASDAQ: GOOG  ) , Facebook (NASDAQ: FB  ) , and LinkedIn (NYSE: LNKD  ) offer their employees benefits and perks that short-term cost-oriented managements would likely call insane.

There's absolutely nothing crazy about fostering a workforce that doesn't see much reason to leave; feeling appreciated and garnering more than just a paycheck builds loyalty. Why would employees love their jobs, or feel any loyalty at all, if their companies' management teams display scary, short-term strategies, and when they screw up, have axes that are apparently kept well-sharpened and ready, easily in reach.

Last but not least, employee turnover is actually a major cost, not a benefit. It's a lesson that's apparently hard learned for many corporate managers that treat people as a commodity to be used until it doesn't seem useful anymore.

Changing the perception of layoffs
Layoffs are scary; many of us know how painful it is to be shown the door. In the grander scheme of things though, more people, especially investors, should be extremely concerned about the ripple-effect ramifications of mass layoffs, especially in the companies they own. It's time for a perception change: these can be more about managements' failed strategies than anything employees did. Shareholders shouldn't accept them with bullish excitement, or a status quo shrug.

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Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.

3 Tempting Dividend Stocks Investors Might Want to Avoid

Dividend investing has long been a haven for investors who want to receive a reliable stream of income rather than wait for capital gains to materialize. Having those dividends deposited in your account each quarter alleviates concerns that you might have to sell stock at the wrong moment in order to generate income. Instead, you keep on collecting dividends even when the market is down.

Unfortunately, investors sometimes forget that not all dividend stocks are created equal. As tempting as it may be to zero in on the yields offered by Guess?, (NYSE: GES  ) , Darden Restaurants (NYSE: DRI  ) , and Starwood Hotels and Resorts Worldwide, (NYSE: HOT  ) , the business prospects of each company are uncertain enough to make them dangerous stocks to hold in conservative dividend portfolios.

It's anyone's guess if this company will turn around
Guess? distributes about half its earnings as a dividend and offers a 3.75% dividend yield. That sounds great if it's all you know about the company. However, Guess? is going through a challenging period. Operating income is down 44% over the past two years and gross margin declined five percentage points in two years. The company reported weakness across the board in last month's second-quarter earnings release. Guess? desperately needs to get back in front of fashion trends so that it can stabilize earnings.

Although Guess? might pull off a turnaround, it's not the type of stock that many dividend investors would want. If you're just looking to collect payments each quarter, you probably want a big and safe dividend. A blue chip retailer like Nordstrom might be more appropriate for a dividend portfolio because of its stability.

Desperate for diners
Like Guess?, Darden Restaurants has an enticing dividend with a dividend yield at 4.6% -- close to an all-time high. The company's stock price is down 9% so far this year, making it an interesting candidate for contrarian investors. However, dividend investors may want to steer clear despite the stock's apparent attractiveness.

High unemployment and stagnant wages for low- and middle-income households limit Darden Restaurant's ability to drive customers to its locations. Olive Garden – which generates more than half of Darden Restaurants' total sales – experienced declining  traffic and lower same-store sales in every month of fiscal 2014.

November results would have been negative had Thanksgiving Weekend not been shifted to December results. Source: Company filings.

The traffic problem is so bad that Olive Garden is resorting to gimmicks like its latest giveaway: $100 for seven weeks of pasta. USATODAY reports that all 1,000 "Never Ending Pasta Passes" sold out in 45 minutes. The company plans to promote more giveaways in the coming weeks, according to the newspaper.

No matter how much buzz the giveaways generate, Darden Restaurants' long-term financial health depends on a strengthening economy. Dividend investors ought to wait for same-store sales to improve rather than tempt fate to catch a falling knife.

The risk might be too big
Unlike Guess? and Darden Restaurants, Starwood Hotels is producing near the high end of its potential. The company earned $3.28 per share in 2013, its best result since 2006. The stock's 1.7% yield may be tempting given the company's financial success, but investors should be cautious. Starwood operates in a highly cyclical industry where earnings – and dividends – rise and fall with the economy.

Data source: Morningstar 

Although the company is expanding its geographic footprint, almost half of Starwood's available rooms are located in the United States. This could provide upside in the event that the domestic economy continues to improve, but it exposes investors to significant downside risk in another recession. In any event, dividend investors who abhor the thought of a dividend cut should avoid Starwood altogether.

Takeaway
Guess?, Darden Restuarants, and Starwood Hotels are not necessarily bad investments just because they have some hair on them. but these stocks are probably not appropriate for dividend investors who seek safety of principal in addition to high dividends. If this sounds like you, you might want to look elsewhere.

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